Fiscal economics is foremost a delicate high-wire act. Even the slightest
move can unbalance everything. Thus, detrimental ramifications were
expected to arise from the Bank of Israel’s decision Monday to lower interest
Lower interest was all but unavoidable against a global backdrop
of rock bottom rates, lest the shekel again lure foreign investors/speculators.
This in turn would overvalue it and render our exports too expensive and unable
to compete internationally. The results could lead to loss of markets, business
failures and massive layoffs. Hence interest rates must occasionally be
But while lower rates might discourage currency speculators,
they beckon other players. Foremost they make mortgages more affordable, helping
further pump up the already engorged real estate bubble. If unchecked, this can
trigger something akin to what Fannie Mae and Freddie Mac wrought in America
five years ago, a crisis from which the world hasn’t truly recovered.
profligate mortgage policy can destabilize the banks and with them the entire
financial underpinning of the economy.
The fact that it has been getting
significantly easier to obtain mortgages in Israel enticed many to take out
whopping ones by local standards. The danger is that many of the borrowers may
be getting in way over their heads. They may lack the wherewithal to ensure they
can keep up monthly payments. Down the line this could adversely impact the
resilience of our banks, which need to amass the capital to secure the mortgages
To preempt trouble BOI governor Stanley Fischer announced new
loan-to-value limitations on mortgages.
Up until this week it was
possible to purchase a NIS1.5 million flat for only 10 percent down. Such hefty
90% mortgages would no longer be available to anyone. This isn’t
hardheartedness, but an attempt to manage the real estate fever before it soars
out of control.
Moreover, a socially-conscious differentiation was made
among the several types of mortgage applicants. First-time home-buyers can still
receive a 75% mortgage. Families upgrading their accommodations are eligible for
70%, but investors – including overseas buyers – who are acquiring the real
estate not for their own residence, will not be entitled to more than
The latter category of real estate purchasers – as distinct from
home-buyers – account for over 25% of all real estate transactions in this
country and their numbers are growing, thereby sending prices spiraling
By this past August Israeli banks had loaned almost NIS 6
billion in mortgages – nearly NIS 800m. of it to investors. Indeed, investors
have been buying up property like hotcakes, and statistics show that at least
20% of them have been reselling the newly bought properties within six months of
purchase, raking in massive profits despite high taxes. Because of the tempting
mortgage offers, these operators don’t need to put much of their own capital
We don’t begrudge anyone’s money-making success, but such wheeling
and dealing inevitably pushes real estate prices sky high for everyone. The
culprit that overheats the housing market is low interest and the consequent
attractiveness of mortgages. This is a worrying departure from what was once
Not too many years back, Israeli young couples took
relatively small mortgages and gravitated away from trendy hubs. Today they
hanker after city-centers and take out gargantuan mortgages. Once, a mortgage
whose value reached 30% of an apartment’s cost, seemed excessive.
two-thirds seems minimal. A 15-year mortgage was long by yesteryear’s criteria.
Today 25 years aren’t unusual.
Israelis might not be overextending
themselves quite as grotesquely as their American counterparts, but they are
fast headed in that general direction. Massive mortgages were hitherto unknown
in Israel. Ours, after all, was a country in which mortgage-lenders were
traditionally tightfisted and ultra-regulated. It was never simple to obtain a
mortgage, especially a hyper-sized one.
This isn’t only the exclusive
concern of eager banks and impulsive clients. The country’s economic wellbeing
hangs in the balance. The BOI consequently deserves unstinting support for at
least trying to break the vicious cycle of rising real estate prices and low
interest rates. In combination, these are the classic ingredients for a crisis.